Public Procurement Reform

Public Procurement Reform

13/10/2017

Background

In Ukraine, the purchase of goods, works, and services using funds from the State Budget was a problem area for the public administration system under all governments. Redirection of budgetary flows into their own pockets is a sad Ukrainian tradition. This is the source of corruption at all levels of government, from local to national. The difference is only in the amount of funds stolen from the state.

And there is something to redeploy. The volume of public procurement in Ukraine is about 13% of GDP per annum. In 2016, the potential volume of public procurement was about 250 billion UAH. Experts at the Ministry of Economic Development and Trade estimate the corruption component at 50 billion UAH a year.

In past years, the cost of government contracts was often artificially overestimated. A large part was used for “kickbacks” to officials who directly decide on the purchase of goods or services from a company. So, the selection of suppliers was carried out on a noncompetitive basis. According to Transparency International, the amount of “kickbacks” reached 60% in 2012.

At the same time, the Ukrainian government has almost never been interested in reforming the public procurement system, they only changed the beneficiaries of this or that “carve-up” of budget funds or those with whom they had to share “kickbacks”. Despite the change of political colors, every new official quickly mastered the practice of his predecessor: the old schemes were adopted by new “underbosses”, other curators ran financial flows.

After the Orange Revolution, the public procurement system was not changed at all. Governments led by Viktor Yanukovych and Mykola Azarov did not consider it necessary to make any radical changes in this area. Only the Revolution of Dignity has changed the situation in this matter. The new government has demonstrated its readiness for reforms; moreover, they were strongly demanded by the public and Ukraine’s international partners. Under so much pressure, it was simply impossible not to start radically changing the system. Since then, public procurements have become one of the reforms indicators for international partners of Ukraine. Looking ahead, we can say that Ukraine has created a product setting an example to other countries.

Public Procurement Reform and harmonization of Ukrainian legislation with EU legislation in this area are among the conditions under the EU Association Agreement and the agreement on EU Macro-Financial Assistance to Ukraine of up to 1.8 billion EUR (signed on June 18, 2015). Improvement of public procurement procedures is one of the most important reforms (62 in total), which is described in the Strategy for Sustainable Development Ukraine 2020, adopted in January 2015.

Key authorities

The Ministry of Economic Development and Trade of Ukraine is the successor to the Ministry of Economy, established in May 1991 by the law of the Ukrainian SSR. After the ministry was renamed several times it received the current name by presidential decree in December 2010.

State Enterprise ProZorro was created by renaming the State Enterprise Zovnishtorgvydav and is managed by the Ministry of Economic Development.

Antimonopoly Committee of Ukraine (appeals against decisions) was created on the basis of the relevant law in November 1993.

Reform objectives

• To minimize corruption in public procurements, and ensure transparency of the entire tender process.

• To simplify tendering proceedings by switching them to online mode, fiscal austerity and time-saving.

• To involve businesses in public procurements, raising the level of competition.

• To ensure transparent public procurement procedures; provide the public with free access to all agreements for analysis and control.

• To harmonize Ukrainian legislation with best European practices.

New system

The implementation of public procurement reform began in 2014 with the Law of Ukraine On State Procurement. The key innovations are: the law reduced the list of grounds for the use of the noncompetitive procedure, adapted procurement procedures to European practice, and reduced the list of cases (from 44 to 10) which are not subject to the law.

On February 12, 2015, the ProZorro public e-procurement system (ProZorro 1.0) was launched in test mode. The system allowed companies to submit their offers electronically and attracted a wider range of suppliers to public procurement. Initially, state institutions and state enterprises made their own decisions on whether or not to join the system. To popularize the ProZorro system among civil servants and potential suppliers, numerous seminars, training sessions, and online courses were held.

In September 2015, the Verkhovna Rada adopted, and the President signed the Law On Amendments to Certain Laws of Ukraine concerning the Public Procurements for bringing them into line with international standards and implementation of anti-corruption activities (No. 679-VIII).

The main fundamental changes to the above-mentioned law were as follows:

1. The introduction of the innovative electronic tendering system.

2. The increase in the minimum purchase cost for mandatory tendering: goods and services – from 100,000 UAH to 200,000 UAH, works – from 1 million UAH to 1.5 million UAH.

3. Customers are no longer obliged to send an annual plan and changes to it to the State Treasury.

4. To take part in a tender participants are not obliged to submit information and certificates that are in the public domain.

5. Now verification of references and other documents on the tender qualifications are required only for the winner.

6. The number of state bodies intervening in the tendering procedure has decreased.

7. The opening of the bid after the end of the bidding and free access to the assessment of offers.

On December 25, 2015, the Verkhovna Rada adopted the Law On Public Procurement. The president signed the law on February 16, 2016. The main innovation is: procurement via electronic systems became mandatory in 2016 (for the purchase of goods and services amounting to more than 200,000 UAH, and works – over 1.5 million UAH): from April 1 – for central executive bodies and state monopolies, and from August 1 – for local authorities and public utilities.

Other important changes in the procurement system should also be noted:

1. The tender committee for public procurement may include professional purchasers.

2. The introduction of the concept of a central purchasing organization, which is created in case there are several customers, simplifying the procurement system.

3. Verification of the final beneficiary of participating companies.

4. Legal entities are denied participation if they do not have an anti-corruption program or authorized person to implement the corruption program, while the price of the tender exceeds or equals 20 million UAH.

5. Public procurement procedures are divided into open tendering, competitive dialogue and negotiating procedure.

6. Open tendering is conducted in the form of an auction, considering non-price categories.

7. The customer should definitely provide a report on the conducted procurement without the use of the electronic system if the cost of the contract tendered is from 50,000 UAH to 200,000 UAH.

The current practice of ProZorro’s work has shown that the adoption of necessary laws and launching of the system is not the end but rather the beginning of public procurement reform. So as to minimize corrupt practices, the ProZorro system is constantly improving. Thus, a library of specifications for goods and services was created, a minimum amount and a purchase period were set (expected value – at least 3,000 UAH, duration of the tender – no less than two days), additional tools for procurement monitoring are introduced, payment control function was implemented, etc.

ProZorro 2.0 (launched on April 1, 2016), has made it possible to contest the tender results electronically. The system tool allows monitoring online not only of the correctness of customer actions but also competitor activity. During the tenders, the system enables consideration not only of the cost performance of the offers submitted by different suppliers but also non-price criteria: the attractiveness of payment terms, the term of contract performance and warranty service, etc.

However, the implementation alone of the system cannot eradicate all corruption: it cannot be eliminated either by regulatory acts or by increased criminal liability or by modern IT systems. The bidders are facing challenges that were also typical of procurement practices in the past: prescribing conditions for a single supplier, groundless bidding cancellation or disqualification of the supplier (for example due to “incorrectly completed documents”, non-conformance with the “tender specifications” or other formal reasons), low professional level of workers responsible for procurement procedures, low level of competition, connected with certain barriers to participation in tenders, particularly the need to obtain references in power structures and the low level of trust between business and the public procurement sector, etc.

However, ProZorro makes such violations noticeable. For example, the system discloses information on procurements where the requirements are prescribed for a specific supplier. This enables other tender participants to fight for their rights through appeals.

The ProZorro system will be further developed. The main problem is below-threshold bidding, which is almost half of all government procurements in the country. Therefore, it is necessary to transfer the below-threshold procurements on a competitive basis, reducing the amount of speculation. Moreover, the ProZorro system needs to be integrated with open state registers. As part of the harmonization with EU legislation, the provisions of Directive 2014/24 /EC and Directive 89/665 /EEC as amended by Directive 2007/66 /EC, as defined in Annexes XXI-B, XXI-C to the EU Association Agreement, should be implemented in the legislation of Ukraine.

Results of implementation

During the pilot stage, the ProZorro system saved about 600 million UAH worth of public money in one year (February 2015 – February 2016). The total sum of tenders (about 50,000) announced during the year amounted to 9 billion UAH.

In 2016 there were already 366,000 procurements for the total amount of 274 billion UAH, and 101,000 of them were above-threshold (22,000 passed through the ProZorro system), 136,000 – below-threshold, and reports on another 128,000 procurements were downloaded into the electronic system. Total budgetary savings came to almost 10 billion UAH.

One of the most important tasks of the reform was changing business attitudes towards participation in government procurement. Research conducted by Respro at the end of 2015 showed that 71% of businessmen did not consider themselves to be potential state suppliers, and only 12% tried to bid through the ProZorro system (functioning in test mode at that time). However, the main motivation for those who were ready to try was assistance in combating corruption in the country, rather than profit from increased sales.

Suppliers reasonably considered the state to be not the best partner for business. The business sector was afraid of corruption, delayed payments, cross-checks with power and controlling bodies, difficulties in appealing against unlawful actions of unscrupulous customers, and evasion of officials’ responsibility for misconduct.

In May-June 2016, an opinion poll undertaken of entrepreneurs supported by USAID, showing that the use of the ProZorro system significantly (27%) or partially (53%) reduced corruption in public procurement. 54% of businessmen encountered corruption while using the traditional “paper” system, but with the advent of ProZorro, this figure decreased to 29%. A significant percentage of respondents (80%) noted that the ProZorro system ensures the simplicity of documents handling and largely solves the problem of openness, accessibility, and clarity of tender details (68%) and the choice of the winner (57%).

In addition, the reform of the public procurement system has opened doors to Ukrainian suppliers of works and services to the relevant markets of other countries. On March 16, 2016, the Verkhovna Rada adopted a law under which Ukraine has joined the WTO’s Government Procurement Agreement. This decision opens the public procurement market of all participating countries, which is estimated at 1.7 trillion USD per year.

NGOs

Experts, journalists, and the public are closely following the implementation of public procurement reform. The following can be distinguished as among the organizations which are monitoring the implementation of the reforms:

The ProZorro project was launched as a volunteer initiative, that is, by the efforts of civic activists, and it has only subsequently gained significant support from the management of the Ministry of Economic Development and international donors.

ProZorro’s success has not gone unnoticed by the international community. Last year Ukraine ranked first in the world in government openness and received an annual Open Government Awards 2016 for implementing the system. Moreover, in 2016 ProZorro won the most prestigious international award in the procurement field, the World Procurement Awards 2016. Already this year, ProZorro has been rewarded at the Davos Awards 2017 contest in the nomination of Trust of the Future. In other words, the success of ProZorro is confirmed by international recognition. Several states have expressed their interest in using ProZorro as the basis for developing their own public procurement systems.

Development of the system based on open source software was carried out in partnership between the authorities, business sector, and civil society; at the first stage, it was administered by Transparency International Ukraine. In December 2015, all ownership and the relevant intellectual property rights for ProZorro system were “transferred to the people of Ukraine (state)”, namely to the State Enterprise Zovnishtorhvydav; later it was renamed the State Enterprise ProZorro, managed by the Ministry of Economic Development and Trade.

The ProZorro system was created and launched only thanks to donor but not public funds. The following donors should be noted: the European Commission, the EBRD, the United States Agency for International Development (USAID), Western NIS Enterprise Fund, UK Department of International Development (DFID), Transparency International Ukraine, the International Renaissance Foundation, etc. Furthermore, a significant amount of free assistance such as consulting, training, work, and resources, has been received.

Related projects were created within the system. For example, a monitoring portal called Dozorro was created to monitor procurements and report suspicious transactions. The ProZorro.Sales system was also launched, which is a platform for selling the property of insolvent banks and state enterprises.

Timeline

March 2014 – the first meeting of the initiative group on the creation of the public e-procurement system.

April 2014 – The Verkhovna Rada adopted the Law On Public Procurement (the validity of the law ceased with the adoption of the Law of Ukraine on December 25, 2015, No. 922-VIII).

July 2014 – a working group on implementation of the public e-procurement system was set up in the Ministry of Economic Development.

January 2015 – Strategy on Sustainable Development Ukraine-2020 was adopted.

February 2015 – Launch of the ProZorro pilot version.

March 2015 – Ordinance of the Cabinet of Ministers On experimental use of electronic means in a procurement negotiated procedure (was repealed under the ordinance of the Cabinet of Ministers No. 610-r of August 23, 2014); a pilot project on above-threshold procurements for the Ministry of Defense.

September 2015 – The Verkhovna Rada adopted the Law On Amendments to Some Laws of Ukraine in the Field of Public Procurement for bringing them into line with International Standards and Taking Measures to Combat Corruption (No. 679-VIII)

September 2015 – The President signed law No. 679-VIII

December 2015 – The Verkhovna Rada adopted the Law On Public Procurement (No. 922-VIII); MPs voted in favor of amendments to the law on February 4, 2016, and it was sent to the president for signing.

November 2015 – During the meeting of the WTO Committee, it was decided that Ukraine would accede to the Government Procurement Agreement

February 2016 – The President signed the Law On Public Procurement.

February 2016 – the Cabinet of Ministers adopted a resolution on the functioning of the e-procurement system and the authorization of electronic platforms

March 2016 – The Verkhovna Rada adopted a law under which Ukraine joined the WTO’s Government Procurement Agreement.

April 2016 – all purchases by the central executive authorities and state monopolies were transferred to the electronic platform.

August 2016 – all purchases by local authorities and public utilities were transferred to the electronic platform.